Developing an early warning system to predict currency crises in emerging markets

Abstract

This thesis develops a new early warning system (EWS) model to predict the currency crises in emerging markets by using the logit regression. According to the results, the macroeconomic variables and the institution variables are valuable indicators which play important roles in EWS model for predicting the currency crises. It shows that the real exchange rate, export growth, import growth, current account surplus/GDP, short-term debt/reserves have correct sign and are statistically significant at 5% level. It also shows that the law and order, external conflict have correct sign and are statistically significant at 1%. In addition, this thesis also applies credit-scoring method to get the optimal cut-off threshold in order to have a more accurate probability of predicting currency crises. Since then, the policymakers can consider taking the effective pre-emptive actions to prevent the currency crises occurring in the future.